Jose F. Otero, President, Signals Telecom Consulting
Latin America's telecommunications industry midsummer dream was not Uruguay's 15th Copa America title, but the announcement by Netflix (Nasdaq: NFLX) of its intentions of launching services in 43 Latin American and Caribbean markets. The initial uproar was magnificent: consumers (mostly from high income households) were delighted, while operators were not amused. Netflix' launch already took place throughout the region and the initial excitement from the press has been transformed into a negligible presence in regional media and reviews focusing on the "need to improve" parts of the service. But, the question remains: would Netflix be successful in Latin America?
It is indeed a difficult prognosis to provide since, contrasting to what some may believe, the competitive environment to be faced by Netflix in Latin America and the Caribbean is in many instances harder to the one the encountered in the United States for their over the top (OTT) video service. Back in their home market, their OTT video offer started slowly as a value added service for their traditional CD rental clients or, as they say in business lingo: They leveraged their existing customer base to introduce a new product that would later be used to ignite organic growth. South of the border, they don't have this nice cushion to help push their OTT video service. On the contrary, Latin America and the Caribbean would present distinct challenges to Netflix that would force the provider to evolve to be successful. Following are some of the obstacles being faced by Netflix in the region:
- Broadband: Netflix users require a broadband connection to access the service. In other words, by definition the service is targeting medium- to high-income households as well as selected industry verticals that could benefit from a la carte selection of movies and TV series. This limits its potential addressable to around 30 percent of all households and less than 15 percent of all mobile users. The good news is that the segment most coveted by Netflix--high end households with affinity toward American TV series--is included on this group. Nevertheless, broadband poses three main problems: quality of service (i.e. interruptions), price, and downlink speeds.
- Rates: Netflix has adopted a pricing scheme similar to the one offered to its U.S.-based clientele. Besides Latin America and the Caribbean consumers being more elastic to price fluctuations, the most important concern is how to tackle competitors that offer similar services for free, for example Cuevana. In fact, due to Netflix' limited initial offer and lack of subtitles in some of its titles, this free OTT video option may seem superior for Latin American consumers. Also, Cuevana does offer a mobile application that makes Netflix' incursion to the regional mobile space a hard sell to consumers.
- Content: the main challenge is acquiring local content that is attractive for consumers, as not all American series would be popular in such a heterogeneous region. Netflix did manage to solve this problem in many markets by closing deals with some of the most relevant content providers in the region, but has yet to announce a similar deal (in terms of importance) for Brazil. That said, after its first month of operations Netflix Brazil announced that it recorded one million TV hours streamed by its users.
- Net Neutrality: There's always the possibility of some operators degrading their broadband connection speed to prevent users from accessing Netflix. The problem is exacerbated when it refers to the mobile application for the service, as most mobile broadband connections are capped: How would consumers react to slower speeds (EDGE) or greater invoices at the end of the month? Also, how would fixed broadband wireless providers react to an increased use of Netflix by their users?
The final chapter of Netflix' arrival to the region deals with the not-so-unexpected reaction from market actors to the arrival of the content competitor. Almost every other week a new OTT video service is announced in the region. The new actors are telecom operators such as Mexico's Maxcom with YuzuTV or Argentina's Telecom with ArnetPlay. Of course, these are only two examples of services that are already being commercialized, but many others have already been announced or are expected from players such as Telefonica (NYSE: TEF), America Movil (NYSE: AMX), DirecTV (Nasdaq: DTV), Totalplay or Oi, as well as from foreign players such as U.S.-based Crackle that plans to launch services in Brazil and then expand into the rest of the region. On the regulatory side, Netflix will definitely force many regulatory entities to discuss net neutrality in the coming years. It's just a matter of time before a legal complaint involving Netflix is filed in one of its new markets. Would it be due to degrading the video signals on a wired network? Would it be in relation to congestion of mobile networks? Would it be related to the upcoming LTE networks? At the end it doesn't matter; the fact is that no established facilities-based telecom operator (be it wired or wireless) is going to be pleased to see its traffic skyrocket due to increased use of external OTT video services.
I know that I promised my perspective on the situation and it's very simple. Netflix would find a nice market niche in Latin America but it won't be able to replicate its success or market dominance of the United States OTT video market. The competition would be fierce and it would seem to come from all market segments and soon, very soon, it might find itself with some Latin American content providers not renewing their contract as they would rather use it on a exclusive basis for their own service.
Jose F. Otero, President, Signals Telecom Consulting is a regular Fierce Telecom columnist writing about Latin American telecom trends. He can be reached at [email protected] and on Twitter at @Jose_F_Otero.